AVERAGE selling price (ASP) will be a key determinant to sustain Kossan Rubber Industries Bhd’s profit margin moving forward although the outlook seems encouraging with the recent surge in COVID-19 cases.
MIDF Research expects glove prices to remain high in the coming quarters with ASP which has already risen 60% quarter-on-quarter (qoq) may continue climbing given the trajectory of the pandemic is still filled with uncertainties even as many countries have rolled out their respective vaccination programmes.
“The positive surprise can be attributed to higher-than-expected ASP as well as better-than-expected profit margin,” analyst Ng Bei Shan pointed out in a results review of Kossan.
For its 1Q FY2021, Kossan posted a 1,500% jump in net profit to RM1.04 bil (1Q FY2020: RM65.27 mil) while its revenue spiralled to RM2.19 bil from RM611.46 mil in the same period last year. An interim dividend of 12 sen was announced for the quarter.
“Looking beyond 2021, uncertainties may emerge for ASP and the quantum of price adjustment cannot be ascertained at this point.
“As such, we decide to take a lower valuation of 17.5 times compared to 22 times previously. Our target price of RM5.83 (previously RM7.33) is premised on FY2022F earnings per share (EPS) of 33.3 sen.”
Maintaining its “buy” rating on Kossan, the research house expects correction in share price to be a buying opportunity as the company is likely to register better performance in the coming quarter.
“Even as we assume a correction in ASP in FY2022F, valuation remains undemanding,” opined MIDF Research.
“Risks to our call include a sharper than expected fall in ASP, production and supply chain disruption. Dividend yield is estimated at 3.1%.”
Meanwhile, AmBank Research retained its “hold” rating on Kossan but raised the company’s fair value slightly to RM3.65 (from RM3.60 previously).
“We have raised Kossan’s FY2022F net profit by 2% to account for a weaker US$/RM (forex) assumption,” justified the research house.
Going forward, AmBank Research expects glove ASPs to see a decline in 2H FY2021.
“Glove urgency is expected to wane as global COVID-19 vaccination measures start to take effect,” reckoned the research house.
“However, the demand for gloves will likely remain stable post-COVID-19 following the wider adoption of gloves in developing countries.”
At 9.28am, Kossan was up 30 sen or 7.89% to RM4.10 with 8.2 million shares traded, thus valuing the company at RM10.48 bil. – April 21, 2021
